Keep Calm & Carry On

Authored by 720Global's Michael Liebowitz via,

“Before long, we will all begin to find out the extent to which Brexit is a gentle stroll along a smooth path to a land of cake and consumption.” – Mark Carney, Bank of England Governor

In 1939, the British Government, through the Ministry of Information, produced a series of morale-boosting posters which were hung in public places throughout the British Isles. Faced with German air raids and the imminent threat of invasion, the slogans were aimed at helping the British public brave the testing times that lay ahead. The most enduring of these slogans simply read:

 “Keep Calm and Carry On.”

Ironically, it was the only one of the series that was never actually displayed in public as it was reserved for a German invasion that never transpired. Today, the British Government may wish to summon a fresh propaganda strategy to address a new threat on the horizon, that of the eventuality of Brexit.

The Kingdom Divided

The United Kingdom (UK) is in the process of negotiating out of all policies that, since 1972, formally tied it to the economic dynamics of the broader western European community. Since the unthinkable Brexit vote passage in June 2016, the unthinkable has now become the undoable. The negotiations, policy discussions, logistical considerations and legal wrangling are becoming increasingly problematic as they affect every industry in the UK from trade and finance to hazardous materials, produce, air travel and even Formula 1 racing.

The worst case scenario of a disorderly or “hard” Brexit, whereby no deal is reached by the March 2019 deadline, is the most extreme for investors along the spectrum of potential outcomes. A deadlock, which is unfortunately the most likely scenario, would result in tariffs on trade between the UK and the European Union (EU). Such an outcome would result in a rapid deterioration of British economic prospects, job losses and the migration of talent and businesses out of the country. Even before the path of Brexit is known, a number of large companies with UK operations, including Barclays Bank, Diageo, Goldman Sachs, and Microsoft, are discussing plans to move or are already actively moving personnel out of Britain. Although less pronounced, the impact of a “hard” Brexit on the EU would not be positive either.

The least damaging Brexit outcome minimizes costs and disruption to business and takes the form of agreement around many of the key issues, most notably the principle of the freedom of movement of labor. The current progression of events and negotiations suggests such an agreement is unlikely. The outcome of negotiations between the UK and the EU will be determined by politics, with the UK seeking to protect its interests while the EU and its 27 member states negotiate to protect their own.

To highlight the complexities involved, the challenges associated with reaching agreements, and why a hard Brexit seems most likely, consider the following:

  • Offering an early indication of the challenges ahead, German Prime Minister Angela Merkel stated that she wants the “divorce arrangement” to be agreed on before terms of the future relationship are negotiated. The UK has expressed a desire for these negotiations to run concurrently
  • A withdrawal agreement (once achieved) would need to be ratified by the UK
  • A withdrawal agreement would have to be approved by the European Parliament
  • A withdrawal agreement would have to be approved by 20 of the 27 member states
  • The 20 approving states must make up at least 65% of the population of the EU or an ex-UK population of 290 million people
  • If the deal on the future relationship impacts policy areas for which specific EU member states are primarily responsible, then the agreement would have to be approved by all the national parliaments of the 27 member states

The summary above shows that the unprecedented amount of coordination and negotiation required within the 27 member states and between the EU Commission, the EU Council and the EU Parliament, to say nothing of the UK.

The “do nothing and see what happens” stance taken by the British and the EU would likely deliver a unique brand of instability but one for which there is a precedent.

The last time we observed an economic event unfold in this way, investment firm Lehman Brothers disappeared along with several trillion dollars of global net worth. Although the Lehman bankruptcy was much more abrupt and less predictable, a hard Brexit seems likely to similarly roil global markets. The “no deal” exit option, which is the path currently being followed, threatens to upend the intricate and endlessly interconnected system of global financial arbitrage. Markets are complacent and seem to have resigned themselves to the conclusion that since no consequences have yet emerged, then they are not likely.

Lehman Goes Down

In late 2007 and early 2008, as U.S. national housing prices were falling, it was becoming evident that the financial sector was in serious trouble. By March of 2008, Bear Stearns was sold to JP Morgan for $2 per share in a Fed-arranged transaction to stave off bankruptcy. Bear Stearns stock traded at $28/share two days before the transaction and as high as $172 per share in January 2007. Even as evidence of problems grew throughout the summer of 2008, investors remained complacent. After the Bear Stearns failure, the S&P 500 rallied by over 14% through mid-May and was still up over 3% by the end of August following the government seizure of Fannie Mae and Freddie Mac. While investors were paying little attention, the solvency of many large financial entities was becoming more questionable. Having been denied a Federal Reserve backstop, Lehman failed on September 15, 2008 and an important link in the global financial system suddenly disappeared. The consequences would ultimately prove to be severe.

On September 16, 2008, the first trading day after Lehman Brothers filed for bankruptcy, the S&P 500 index closed at 1192. On September 25, just 10-days later, it closed 1.43% higher at 1209. The market, in short time, would eventually collapse and bottom at 666 in six short months. Investors’ inability to see the bankruptcy coming followed by an inability to recognize the consequences of Lehman’s failure seems eerily familiar as it relates to the current status of Brexit negotiations.

If all efforts to navigate through Brexit requirements are as complicated and difficult as currently portrayed, then what are we to expect regarding adverse consequences when the day of reckoning arrives? Is it unfair to suspect that the disruptions are likely to be severe or potentially even historic? After all, we are not talking about the proper dissolution of an imprudently leveraged financial institution; this is a G10 country! The parallel we are trying to draw here is not one of bankruptcy, it is one of disruptions.

As it relates to Brexit, Dr. Andreas Dombret, member of the executive board of the Deutsche Bundesbank, said this in a February 2017 speech to the Bank of International Settlements –

“So while economic policy will of course be an important topic during negotiations, we should not count on economic sanity being the main guiding principle. And that means we also have to factor in the possibility that the UK will leave the bloc in 2019 without an exit package, let alone the sweeping trade accord it is seeking. The fact that this scenario would most probably hurt economic activity considerably on both sides of the Channel will not necessarily prevent it from happening.”


On June 23, 2016, the day before the Brexit vote, the FTSE 100 closed at 6338. After a few hours of turbulence following the surprising results, the FTSE recovered and by the end of that month was up 2.6%. Today, the index is up 17.5% from the pre-Brexit close. The escalating risks of a hard exit from the EU clearly are not priced into the risky equity markets of Great Britain.

Data Courtesy: Bloomberg

Conversely, what has not recovered is the currency of the United Kingdom (chart below). The British Pound Sterling (GBP) closed at 1.4877 per U.S. dollar on June 23, 2016, and dropped by 15 points (-10%) to 1.33 by the end of the month following the Brexit vote. Over the past several months the pound has fallen to as low as 1.20 but more recently it has recovered to 1.33 on higher inflation readings and hawkish monetary policy language from Bank of England (BoE) governor Mark Carney. Despite following through on his recent threats to hike interest rates, the pound has begun to again trend lower.

Data Courtesy: Bloomberg

Carney has voiced concern over Brexit-induced inflation by saying that if global integration in recent decades suppressed price growth then the reduced openness to foreign markets and workers due to Brexit should result in higher inflation. This creates a potential problem for the BoE as a disorderly exit from the EU hurts the economy while at the same time inducing inflation. Such a stagflation dynamic would impair the BoE’s ability to engage in meaningful monetary stimulus of the sort global financial markets have become accustomed since the financial crisis. If the central bankers lose control of inflation, QE becomes worthless.

Some astute observers of the currency markets and BoE pronouncements argue that Carney’s threat of rate hikes are aimed at halting the deterioration of value in the pound and preventing a total collapse of the currency. That theory is speculative but plausible when analyzing the chart. Either way, whether the pound’s general weakness is driven by inflation concerns or the rising risks associated with a hard Brexit, the implications are stark.

What is equally evident, as shown below, is the laissez-faire attitude of the FTSE as opposed to the caution and reality being priced in by the currency markets. In Lehman’s case, the stock market was similarly complacent while the ten year Treasury yield dropped by nearly 2.00% from June 2007 to March 2008 (from a yield of 5.25% to 3.25%) on growing economic concerns and a flight-to-quality bid.

Data Courtesy: Bloomberg

A Familiar Problem

As discussed above, the Bank of England may find itself in a predicament where it is constrained from undertaking extreme measures due to inflation concerns or even being forced to tighten monetary policy despite an economic slowdown. Those actions would normally serve to support the pound. Further, if the prospect of a hard Brexit continues to take shape, capital flight out of the UK may overwhelm traditional factors. In efforts to prevent the disorderly movement of capital out of the country, the BoE may be required to hike interest rates substantially. Unlike the resistance of equity markets to bad news, the currency markets are more inclined, due to their size and much higher trading volume, to fairly reflect the dynamics of the economy and the central bank in a reasonable time frame.

Our perspective is not to presume a worst case scenario but to at least entertain and strategize for the range of possibilities. Equity markets, both in the UK and throughout the world, transfixed by the shell game of global central bankers’ interventionism, are clearly not properly assessing the probabilities and implications of a hard Brexit.

All things considered, the pound has rallied back to the high end of its post-Brexit range which seems to suggest the best outcome has been incorporated. If forced to act against inflation, the Bank of England will be hiking rates against a stagnant economy and a poor economic outlook.  This may provide support for the pound in the short term but it will certainly hurt an already anemic economy in the midst of Brexit uncertainty.


Timing markets is a fool’s errand. Technical and fundamental analysis allows for an assessment of the asymmetry of risks and potential rewards, but the degree of central bank interventionism is not quantifiable. With that premise in mind, we can evaluate different asset classes and their adherence to fundamentals while allowing a margin of error for the possibility of monetary intervention. After all, if central banks print money to inflate asset prices to create a wealth effect, some other asset should reveal the negative effects of conjuring currency in a fiat regime – namely the currency itself. In the short term, it may appear as though rising asset prices create new wealth, but over time, the reality is that the currency adjustments off-set some or all of the asset inflation.

Investors should take the time, while it is available, to consider the gravity of the disruptions a hard Brexit portends and look beyond high flying UK stocks to the more telling movement of the British pound. Like with Lehman and the global financial system in 2008, stocks may initially be blind to the obvious. Although decidedly not under the threats present during World War II, the British Government and the EU lack the leadership of that day and will likely need more than central banker propaganda to weather the economic storm ahead.

Keep calm and carry on, indeed.


BritBob Fri, 11/17/2017 - 05:04 Permalink

 The Crazy EUMEPs and legal experts have claimed the veto over the territory’s future after Brexit would give Spain special status among EU nation, when they should be on an equal level.The EU’s Brexit negotiating guidelines stated that the Brexit deal will not apply to Gibraltar without an “agreement between the kingdom of Spain and the UK”.Experts have told the Telegraph that the veto could be illegal under EU law.Spain's Gibraltar claim has NO legitimacy and YES would be illegal.They've effectively signed the territory away 3x times!Gibraltar – Spanish Myths and Agreements (single page):

Harlequin001 BritBob Fri, 11/17/2017 - 05:10 Permalink

I got as far as the 4th paragraph and gave up.There is one country on the planet which is the only global trader and it is not the EU.And once we are unshackled from these EU leeches, and someone finally grows the balls to take on the bankers it will be great again.Till then, struggle on, either way.Keep calm and carry on? 'Better out than in' as they say...

In reply to by BritBob

Manthong Harlequin001 Fri, 11/17/2017 - 05:13 Permalink

 All is well..........
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In reply to by Harlequin001

OverTheHedge Harlequin001 Fri, 11/17/2017 - 06:12 Permalink

"German Prime Minister Angela Merkel stated that she wants the “divorce arrangement” to be agreed on before terms of the future relationship are negotiated."

I genuinely thought that the EU was a democratic joining together, a union, a meeting of equals from all countries. Ghordius is forever explaining to us how democratic the EU is, at all levels.

Who the fuck voted Merkel in as boss of the EU? At what point do we admit that Germany runs the entire EU, for the benefit of Germany? Am I missing something here? Why does someone elected by a smallish minority of Germans get to dictate terms, to the detriment of the UK? No consultation with the other 27 countries? Just Merkel wants, so Merkel gets, apparently.

In reply to by Harlequin001

Singelguy Thoresen Fri, 11/17/2017 - 07:41 Permalink

Given the approval process described in this article, it is 99% certain that there will be no agreement and even if an agreement is reached it has little chance of being ratified, especially by March 2019. Everything in the EU bureaucracy moves at a snail’s pace. They will be lucky to get an agreement by 2019 and would probably require another 7 years to ratify.

I agree that the UK has the upper hand. May should just give Brussels an ultimatum and be prepared to walk away. Watch the car makers in Germany and every other major industry that would be adversely affected start panicking and screaming. The EU would fold like a cheap suit. In the meantime, the UK government should be initiating trade talks with other non EU member countries. When the hard Brexit hits, the pound will decline but if they have other trade agreements in place it will work to the UK’s advantage.

In reply to by Thoresen

Ecclesia Militans Fri, 11/17/2017 - 05:17 Permalink

The British love privation - they may have to wander through the wilderness as they did in the 1970s with rotting teeth and no coal for the stove on certain days during the week, but the only long-term outcome of that kind of experience will be to drive the Muslim invaders across the water to Spain.  The Brits will have their Pound while the rest of western Europe will have contagion.

gmak Fri, 11/17/2017 - 05:19 Permalink

"Such an outcome would result in a rapid deterioration of British economic prospects, job losses and the migration of talent and businesses out of the country."The UK buys more from the EU than it sells to it. Please explain how this happens?  Wouln't the EU businesses impacted want to set up in the UK to avoid the tarriff wall if it was a significant part of the business?

sawman gmak Fri, 11/17/2017 - 06:06 Permalink

Absolutely. More scaremongering crap by the globalists. UK exports in goods and services to the EU are £240 billion while imports run at £320 billion.
Long term while business will have to realign to deal with the imbalance no jobs will be lost, in fact likely the contrary, and Armageddon will one again prove to be a scare tactic. That doesn't even take into account the additional jobs freed up by stricter border control and migration rules.
Short term pain, long term gain. Iceland is a good micro example.

In reply to by gmak

OverTheHedge sawman Fri, 11/17/2017 - 06:18 Permalink

320 minus 240=80 billion GBP of opportunities, does it not? If all EU products have a hefty tarrif attached, UK companies can compete much more readily. If I lived in the UK right now, I would be scouting around for something to make that currently has to be imported, for economic reasons.

In reply to by sawman

man of Wool gmak Fri, 11/17/2017 - 07:31 Permalink

Because UK businesses will lose trade. The balaance of payments is only of concern to the bankers and economists, not the businesses. The main problem is that nobody really knows. There are too many variables to make a confident prediction of the future which is why it seems irresponsible economically to leave the EU. it is a gamble. In practice there will be a new agreement with the EU. Whether it is Brexit or not depends on your point of view. It seems many of the hard line brexiters are do not really want brexit but take it as a negotiating position, like Boris Johnson. They believe they can blackmail the EU. Others just want out and don't give a shit about the economy or anything else. These are mostly retired people who believe their state pensions will protect them from becoming poorer. 

In reply to by gmak

Doom and Dust Fri, 11/17/2017 - 05:58 Permalink

Keep calm and carry on deluding yourselves Britwits.I am going to thoroughly enjoy watching the UK turn into the shithole it was before joining. This is going to be fun.

Cloud9.5 Doom and Dust Fri, 11/17/2017 - 08:07 Permalink

England is an island.  As the mother of the industrial revolution, it built an empire that stretched around the world. It became a magnet for divergent populations. A monopoly on sea power, the iron works in Bermingham,  and a massive maritime trade gave them a huge advantage.  That monopoly collapsed in the middle of the 20th century.  England went into decline.  It seems the last vestige of an empire in decline is the monopoly it retains on banking.  Roman coin retained its worth even after the empire was dead.  The city had become the hub of world finance. The banking class prospered during the sunset of empire while the rest of the economy languished.  World finance is now shifting east and west.  British banking while still having a huge influence is declining in power.   The North Sea oil gave the declining economy a much needed shot in the arm.  Pay attention to the trends in Venezuela and Saudi Arabia.   The dense energy in oil grew populations well beyond the carrying capacity of these two nations.  The easy wealth produced a huge leisure class. England now has a huge leisure class that is sustained by creative bookkeeping.   North Sea production is in serious decline.  Oil platforms are being cut up for scrap.  The Margaret Thatcher days are over.  Reverend Malthus will once again become relevant to the British experience.We here in North America should take no solace in this.  We are on the exact same trajectory.  

In reply to by Doom and Dust

falak pema Cloud9.5 Fri, 11/17/2017 - 09:04 Permalink

Brexit was the symptom of the collapse of anglo monopoly games of WS/City combine, recycling petrodollar digitalized moneyline, now coming apart; but the CAUSE of sympton lies elsewhere : at the Nexus of NWO created by the Bandar-Bush-MIIC combine; now being challenged in its heartlands of Bandar and Bush lands...You have to go to the HEART of the matter when talking about decaying empires.

In reply to by Cloud9.5

HurricaneBrasky Cloud9.5 Fri, 11/17/2017 - 12:10 Permalink

1. Thermonuclear weapons change the 'collapse of an empire' paradigm. I don't see the premier US European ally/master of hegemony being allowed to disappear. I think you're right on the likely rise in British wealth inequality, but short of it inspiring social revolution, it will be largely irrelevant. 2. I don't think Malthus accounts for modern farming techniques, nor the automation that is coming...but, will our masters care to feed us? No, because fuck us, right?

In reply to by Cloud9.5

falak pema Fri, 11/17/2017 - 07:49 Permalink

Its amusing to see ZH post this post; given that the Libertarian mantra defended by the Tylers has always propounded :Farage will save the Brits from Euro statism. He is Ivanhoe ! Haha! Ivanhoe just wants to work for Sauron of Mar a Lago.Now we have this shadow looming like King Kong on Empire state's pinnacle that harbingers visions of an Oligarchically SCAMMED Bulldog Drummond POT calling the EURO KETTLE : Black is Ugly! Some chickens coming home to roost! Can Euro Black by any chance look beautiful to the bemused Millenials of the West, whose future is now the ULTIMATE TEST ?Mutti says "YES" at COP 23; all the while she sings I'll keep Coal frontline in Germany !Some conundrum for the lady who destroyed Greece to save her bankster Oligarchy; who refuses to Eurobond and fiscally rationaiize the core zone relative to Corporatocracy and tax havens, to give the Euro its two legged stool; who now is shit scared when Putin sings to her : Germany how many divisions ?; and continues to sing "we have to save future generations from demographic decline by importing refugees" and save the planet from climate change : the greatest menace to humanity (after the Duck of course, but which cannot be said except in hush-hush). So its a mad world that awaits the green light for the Sauds to light the matchstick that sets Lebanon and the Middle East on fire, pushing the world off the cliff,  into a game of thrones of the fellowship of the Ring: Sunni/Shia and West vs East Trojan war.Some swan song  for the sheeple and deplorable Hobbits sung by the legions of Mordor to say "Sauron is back and humanity is doomed."Next step in this game of trillions : Will Sauron give the green light to the ME madhouse?Is there anyone who can stop that matchstick from hitting the powder keg?

iadr Fri, 11/17/2017 - 08:25 Permalink

 The capital flight out, is of dirty money, destructive-to-the-culture-and-well-being-of-the-country money.So, the more that leaves, the better.

bh2 Fri, 11/17/2017 - 11:00 Permalink

It is a peculiar argument to suggest a nation which independently traded across the world for centuries until becoming mired in the EU version of the USSR can no longer do so because Europe has adopted fantasies and fallacies of "union" and a Euro currency which benefits only a few countries and strangles the rest."Hard" BREXIT was always the only possible outcome. Britain has no requirement to "negotiate" its own ransom. As a sovereign nation, they can simply leave Brussels, withdraw their representives there, immediately negotiate trade arrangements with whoever they please, and wait for the cell door to open automatically when the clock runs out.Brussels has exactly zero power over London, which is suffering only the most laughable case of Stockholm Syndrome.